Looking for further information?

We use cookies to provide a user-friendly experience. By continuing to browse this site, you give consent for cookies to be used. To find out more how to set your own preferences please read our Cookie Policy.

By continuing to browse this site, you give consent for cookies to be used. To find out more please read our Cookie Policy.

IMPORTANT INFORMATION

Please read this Important Information. If you do not agree to the below, please do not accept and enter this site.

The information on this site is only directed at financial advisers and financial intermediaries who qualify as ‘professional investors’ within the meaning of Annex II to Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (the “Markets in Financial Instruments Directive” – “MiFID II”) and is not intended for use by non-professional investors.

Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and investors may get back less than the amount originally invested. Fluctuations in exchange rates may affect the value of an investment and any income derived from it.

Nothing contained within this site should be construed as investment advice by Merian Global Investors or of any other regulated activity. This site is not a substitute for independent professional advice and users of this site should obtain appropriate professional advice relevant to their particular circumstances prior to making any investment decisions. The site must not be relied upon in connection with any investment decision. The products on this site may not be suitable for all investors.

The information on this site is not directed at any US Person. By proceeding, you confirm that you are not a US Person. This site is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

REQUEST INFORMATION

STAY IN TOUCHWITH OUR INSIGHTS

Asian equities

27 Jun 2016

Brexit risks to Asian equities are limited

Asian markets may outperform following the UK referendum on EU membership, which has created buying opportunities

57 viewed

Britain’s decision to leave the European Union has triggered political upheaval in the UK and surprised investors worldwide, weighing on risk assets and boosting demand for perceived safe havens.

Much remains uncertain as to the consequences of Thursday’s referendum. But even at this early stage, it is clear that the result presents both challenges and opportunities for investors.

The immediate economic impact will probably be felt more in UK, where a constitutional crisis now looms, although the EU and euro-area will also face pressure. As companies delay capital expenditure and investment decisions, growth will probably suffer.

The challenge for EU leaders, first and foremost Angela Merkel, the German chancellor, is to maintain trading relations with the UK at the same time as preventing further referendums in the 28-member union.

More broadly, the vote for so-called ‘Brexit’ is a sign of rising global political risks, with populist politicians advancing against a backdrop of income inequality and stagnant wages. Any moves towards protectionism resulting from this trend would hurt world trade and export-orientated economies.

For emerging markets, the direct economic impact is mostly limited to those companies that trade with UK and Europe; broker research estimating this could shave 0.2% off gross domestic product. That said, the near-term hit to risk appetite, seen in the weakness in global equity markets, is a concern for investors.

The Federal Reserve is likely to delay raising interest rates again for even longer, in a boost to Asian issuers of US dollar-denominated debt – although a stronger dollar, a function of the risk-off environment, would likely put pressure on emerging-market currencies over the year. The Bank of Japan, meanwhile, will probably expedite further stimulus measures to weaken the yen.

Scope for Asian outperformance

We expect markets to remain volatile in the short-term, with further demand for perceived haven assets, as fear and even irrationality prevail while the UK tries to chart a new path and the euro area’s frailties again come under the spotlight. But from a relative-value standpoint, Asian equities in particular could outperform the US market, which looks expensive, and Europe, which is in turmoil.

Asian markets have been out of favour and under-owned for some time. Following the shock of Brexit, it is likely that domestic policy will be supportive in the region – especially in markets we favour like India, Indonesia and Vietnam, where the referendum’s impact should be limited.

The immediate effect on China is likely to be contained, given the relatively small size of the UK as a destination for its exports; certain markets with higher proportions of exports to the UK, such as Cambodia, may suffer at the margin.

As very few of the stocks we hold within our Asian portfolios are impacted by weakness in UK or Europe, we have made no material changes to our views or positioning. Most of our stocks are leveraged more to the Asian economy and are typically domestically focused; infrastructure plays, for example.

Ahead of the referendum, we had been running slightly higher-than-usual cash levels given recent strength in markets, the prospect of UK vote and uncertainty around the renewal of the Indian central bank governor’s tenure.

Now, to capitalise on market dislocations, we have selectively used some of our cash position to buy oversold names – especially where they offer a decent dividend yield. We have also partially closed an underweight to Australia, after that market saw sharp declines despite having little exposure to the UK or EU.

Over the short term, we plan on continuing to purchase stocks that have fallen materially yet lack sensitivity to those countries most affected by Brexit. We intend over the medium term to keep the portfolio tilted towards value and mid-cap stocks that should outperform as earnings expectations in Asia bottom out. And over the long-term, we remain focused on building out and identifying structural growth themes that are uncorrelated to the broader market.